Gary Pierson

Let's start with a short refresher on FHA loans. Designed for low- to moderate-income borrowers, an FHA loan is a mortgage issued by an FHA-approved lender and insured by the Federal Housing Administration^Footnote2 (FHA).^Footnote3 The most conspicuous benefit of an FHA-insured loan is a reduced down payment requirement, as low as 3.5%. The majority of FHA loans go to first-time homebuyers, accounting for as much as 83% (excluding refinanced mortgages) in 2018.^Footnote4

Corresponding to the recent rise in FHA-insured new home loans is the federal government's new FHA loan limits that went into effect on January 1, 2019.^Footnote5 In response to increases in home prices, these rules raised the ceiling on loans that year for single-family homes from $294,515 to $314,827 for low-cost areas and from $679,650 to $726,525 for high-cost areas.^Footnote5 In between these two cost areas, the limits are set at 115% of the median home price by county.^Footnote5

Another important change to the FHA rules is the loosened restrictions on purchasing a condo. According to John Smaby, president of the National Association of Realtors, "It goes without saying that condominiums are often the most affordable option for first-time homebuyers…This ruling…will help reverse recent declines in condo sales and ensure the FHA is fulfilling its primary mission to the American people."^Footnote6

An expectation is that developers will take advantage of the revised FHA guidelines by directing more resources toward building condominiums, and thus enable millennials and other first-time homebuyers to benefit from the new rules. If this happens, it would be a win-win situation — for builders and buyers — and could help ease the housing shortage at some point during the new decade.